Why the Boots Alliance merger is a success
With a strong international business, a focus on driving productivity and investment in omnichannel, the Boots Alliance Walgreens business is on track to long-term success.
The inclusion of Boots Alliance’s sales for the full quarter provided a fillip to revenue growth which was up by almost 14 per cent. Underlying sales, while up at headline level, were somewhat more subdued – especially within the US retail pharmacy division.
The warmer weather in the US, especially during the early part of the quarter, was unhelpful – it meant the traditional cold and flu season did not strike with its usual vengeance. This, in turn, suppressed sales of key seasonal lines like flu, cold and cough medicines. This was noticeable in the front of store retail sales decline of 0.3 per cent on a comparable basis; something only offset by a strong prescription performance which pushed the retail pharmacy division’s overall performance into positive territory.
Although cold remedies pulled down front of store sales, Walgreens is making encouraging progress in other parts of its retail offer. As a local retailer with a solid network of well frequented stores, Walgreens has a major opportunity to sell more product to existing customers, as well as drawing in a wider audience for products outside of the pharmacy and wellness space.
Accomplishing this task requires a reinvigoration of the front of store proposition, especially in areas like beauty where Walgreens aim should be to be seen as much as a destination for higher end, more premium brands as it is for essentials and everyday beauty. This transformation has started, especially with the success of the group’s own brands like No. 7 cosmetics, and in the gifting category – which was an area of focus over the holiday period.
In reshaping the front of store offering, Walgreens is ahead of its main rival CVS which has a lot more work to do in order to shift perceptions. Walgreens, of course, has an advantage as it is able to learn from Boots in the UK, which has, for a long time, been successful at selling both premium beauty and many other non-beauty categories. While Walgreens should not aim to simply replicate Boots, there are elements of the proposition – including the focus on lunchtime snacks and takeaway food – that can be adopted and adapted to the US market.
Looking internationally, Boots in the UK had a successful quarter helped by a focus on Christmas gifting and also the strong performance of the ‘order online and collect from store’ service. Similar to Walgreens in the US, Boots in the UK has an extensive and localised store network which makes it a convenient option when it comes to picking up products purchased online. This, again, is something that the US operation can learn from and develop as the group looks to grow its omnichannel capabilities.
Being part of a much bigger group isn’t only creating opportunities for the sharing of brands and ideas, it is also – as the Walgreens always planned – delivering savings. This quarter, synergies saved around US$329 million, and the group remains on target for $1 billion of savings across this quarter. This target is attainable and should help to provide an underlying boost to earnings moving into the second half.
The successful integration of Boots Alliance and Walgreens has likely given the group confidence to pursue Rite Aid – the proposed acquisition of which was announced last October and approved by Rite Aid’s stockholders in early February. All being well, this transaction should close during the second half of this fiscal year.
The deal makes sense on a number of levels – not least because Rite Aid has struggled to keep pace with its two rivals and we believe that Walgreens will be able to quickly make the chain more productive.
Rite Aid has started this work with its Genuine Wellbeing format refresh, which creates a more engaging and enticing shopping experience with enhanced levels of customer service. This is something that Walgreens will be able to bolster, especially through its strong stable of own brands including Boots No 7 cosmetics.
The potential synergy savings that will accrue from the merger are also attractive. These are estimated at $1 billion which, given the complementary nature of both businesses, are conceivable and go some way to offset the premium that Walgreens offered for Rite Aid.
With a strong international business, a focus on driving productivity within the US, investment in omnichannel, and the boost from another acquisition, this looks to be a year of progress and change at Walgreens. While all of this activity may cause some short term fluctuations in earnings and sales, it will successfully position the group for longer term success.
- Neil Saunders is CEO of retail analyst Conlumino.